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Renewals Part 4: Good Cause for Non-renewal.

This is part 4 on the topic of renewals. The focus of this post is ensuring good cause for non-renewal of a franchise agreement. The process and conditions for renewal are commonly set forth in the franchise agreement. The typical franchise agreement provision may read something like this: ‘upon the satisfaction of the conditions set forth below, the Franchisee may be granted a renewal or successor franchise term.’

It seems rather straight forward. If the franchisee meets established conditions, the franchisee is entitled to renewal of the franchise agreement. This seemly boilerplate provision for renewal of the franchise agreement is facially deceiving. The analysis of whether a renewal agreement should be offered must go beyond a checklist of conditions. Laws in numerous states require good cause for denying renewal of a franchise agreement and in states where such laws do not exist, franchisors may be exposed to common law claims for non-renewal.

The need for further analysis in event of non-renewal is brought out in 2 recent cases. In the first case, found in New Jersey, the court held that even if a franchise agreement, by its expressed terms, does not grant franchisee a right to renewal, a franchisor is not free to deny renewal to the franchisee without good cause.

The second case is in Wisconsin. A Franchisor denies renewal to franchiseebased on franchisee’s failure to sign the then current form of the franchise agreement. In this case the court held that the franchisor could not deny renewal based on franchisee’s failure to sign the new agreement, unless the franchisor could show that the terms of the new franchise agreement were essential and reasonable.

The message is clear. When determining whether to grant renewal, look to the terms of the franchise agreement, but most important consider if there is sufficient ‘good cause’ for denying renewal of the franchise agreement. Even if the franchise agreement does not grant an expressed entitlement to renewal and even if the franchisee does not meet the conditions for renewal, the franchisee may still have a legal right to renewal.